The SEC has announced its Office of Compliance Inspections and Examinations’ (OCIE) 2017 examination priorities. The priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges, and municipal advisors and highlight such areas of focus as “robo-advising,” wrap fee programs, money market funds, variable insurance products, anti-money laundering, FINRA oversight and cybersecurity.
The first highlighted area of OCIE’s priorities is registered investment advisers and broker-dealers that offer their services by primarily interacting with clients via online platforms and firms that utilize automation as a component of their services while also offering clients access to financial professionals. This focus may be a reflection of the SEC’s desire to further enhance its knowledge of this complex and growing area, but also the SEC’s continued focus on cybersecurity (also highlighted later as one of the priorities), as well as continued regulatory focus on overseeing algorithms that generate recommendations. Examinations will likely focus on registrants’ compliance programs, marketing, formulation of investment recommendations, data protection and disclosures relating to conflicts of interest.
Several of the highlighted priorities relate to retail investors and, in particular, registered investment companies in which many such retail investors invest. The OCIE will continue to examine ETFs, reviewing them for compliance with applicable exemptive relief granted under the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and with other regulatory requirements, as well as reviewing ETFs’ unit creation and redemption processes. Examinations will also focus on sales practices and disclosures involving ETFs and the suitability of broker-dealers’ recommendations to purchase ETFs with niche strategies. In other mutual fund areas of compliance, the OCIE will continue reviewing conflicts of interest that may affect registrants’ recommendations to invest, or remain invested, in particular share classes of mutual funds, including conflicts arising where investment advisory personnel may also be registered representatives of a broker-dealer. Finally, the OCIE will examine money market funds for compliance with amendments adopted by the SEC in October 2016 to address the risks of redemption from such funds, including via assessments of the boards’ oversight of the funds’ compliance with these new amendments, stress testing and funds’ periodic reporting of information to the SEC.
Another broader theme of 2017 OCIE priorities is a focus on retirement accounts and senior investing. This year, OCIE examinations in this area will likely focus on registrants’ recommendations and sales of variable insurance products as well as the sales and management of target date funds. The OCIE will also assess controls surrounding cross-transactions, particularly with respect to fixed income securities, and will also specifically examine investment advisers to pension plans of states, municipalities and other government entities holding retirement assets to assess how they are managing conflicts of interest and fulfilling their fiduciary duty. The SEC will continue its focus on pay-to-play and undisclosed gifts and entertainment practices affecting such advisers. Finally, the OCIE will evaluate how firms manage their interactions with senior investors, including their ability to identify financial exploitation of seniors focusing on registrants’ supervisory programs and controls of products and services directed at senior investors.
The final broader theme highlighted in the priorities is examining structural risks and trends that may involve multiple firms or entire industries, including oversight of FINRA, clearing agencies and national securities exchanges; registrants’ compliance with the SEC’s Regulation SCI; and anti-money laundering rules. In this regard, the OCIE will also continue to focus on multi-branch advisers, never-before examined advisers and private fund advisers. The published priorities are not exhaustive and may be adjusted in light of market conditions, industry developments and ongoing risk assessment activities. They may also be changed in light of the new Administration and changes in SEC personnel and agency direction.
While on its surface, the focus of the OCIE’s priorities continues to be on protecting retail investors, including individuals investing for their retirement, the OCIE has also indicated that it intends to focus on a wide range of market issues. Despite OCIE’s stated risk-based and data-driven examination methodologies, its 2017 priorities retain a broad-based approach regardless of the degree of market or other implication any perceived non-compliance may have.